Ch. 14 Budgeting Process Flashcards
An estimate of the income and expenditures during a given period of time based on the mission, goals, and objectives of an organization
- It is the organization’s business plan expressed in financial terms
Budget
- Set the parameters for activities to be done during the budget period
- Act as a control device for regulating spending in the organization
- Provide an objective set of criteria (STANDARDS) against which a manager’s performance can be measured
The Purpose of Budgeting
An organization’s total budget that includes an operating budget, a capital budget, a cash budget, and a budgeted balance sheet
Master budget
An estimate of the anticipated cash flow that can be used to project the availability of funds
- Deals with cash on hand, accounts payable, accounts receivable, the cost of credit, and cash flow
(Dietetics professionals don’t generally deal with this)
Cash budget
A statement of the assets and liabilities of an organization based on budget estimates
(Dietetics professionals don’t generally deal with this)
Budgeted balance sheet
Budget that includes the revenue, expenses, direct labor, direct material, overhead budgets, and other operating expenses
- Used in projecting the income of an organization and in allocating funds within an organization
- Are prepared for the entire organization and for each individual operating unit
Operating budget
12-month period for which an organization plans the use of its funds
- Can begin on any date and end 365 days later (366 days in leap years)
Fiscal year
12-month period beginning January 1st and ending December 31st
Calendar year
Operating budget is divided into time periods for the purpose of financial reporting
- Some organizations use calendar months (12 per year)
- Some organizations use 4- week blocks of time (13 per year)
- Some organizations have two 4-week periods followed by a five-week period each quarter (12 per year)
Accounting period
Type of operating budget based on the previous year’s budget and a predetermined increment
- Depend on several factors: inflation rate, labor contracts, profitability, operating losses, restructuring, reengineering, etc
- Increment is usually positive, but could go up or down (e.g. economic downturn)
Incremental Budgets
Incremental Budgets: Advantages & Disadvantages
Advantages
- Easy to prepare
- Relatively precise (if historical data is accurate)
Disadvantages:
- Unresponsive to change
- Discourages innovation
- Supports the status quo
Type of operating budget based on estimated need for the coming year, without relying on last year’s budget as a starting point
- Requires managers to write budgets from scratch and justify every dollar of proposed spending
Zero-based budgets
Zero-Based Budgets: Advantages & Disadvantages
Zero-base budgets work well:
- during restructuring, rapid change, for start-up or high-tech companies
Disadvantages:
- difficult & costly to prepare
- vulnerable to politics & manager’s bias
Budget plan for which funds are allocated for the entire fiscal year (aka static budget)
- Can be used in conjunction with either the zero-base budget or the incremental budget
- Provides manager with measurable goals
- Are inflexible and unresponsive to changes in the volume of work
- Commonly used for non-profit and government organizations
Fixed budgets
Budget plan for which expenses will vary in response to actual production, volume, or revenues (aka flexible budget)
- Can be used in conjunction with either the zero-base budget or the incremental budget
- Allow for variations in costs with volume fluctuations
- More reactive than predictive
- Difficult for some organizations to respond quickly to volume changes, especially when volume decreases
Variable budgets
Types of Budgets
- Incremental/Fixed
- Incremental/Variable
- Zero-Based/Fixed
- Zero-Based/Variable
Budget is based on previous budget cycle; once the percent change has been established, the budget is set at that level for the next budget cycle
Incremental/Fixed Budget
Budget is based on the previous budget cycle; the actual dollars allocated will vary in proportion to the amount of work done
Incremental/Variable Budget
Budget is written “from scratch” for each budget cycle; once the numbers have been established, the budget is set at that level for the budget cycle
Zero-Based/Fixed Budget
The budget is written “from scratch” for each budget cycle; the actual dollars allocated will vary in proportion to the amount of work done
Zero-Based/Variable Budget
- Project revenues
- Estimate labor needs and costs
- Estimate non-labor expenses
- Combine the parts of the budget to project profit or loss
Steps to Preparing Operating Budgets
Any unit within an organization that has expenses
- Some also generate revenue (foodservices, pharmacy)
- Some are not expected to generate a profit or even break even (payroll, HR)
Cost Center
Any unit within an organization that generates income
- Can also be a cost center
- May or may not produce enough income to offset its cost of operation
Revenue Center
A unit within an organization where revenue exceeds operating costs
Profit Center
The projection of the income of an organization (or a department) based on the sale of products
- Is part of an operating budget
- Written only for revenue centers
Considerations:
- The volume of goods/services to be produced and the price
- Revenue from non-sales sources: gifts or grants
- Bad debts (people cannot pay their bill), discounts
Revenue Budget
Part of the operating budget that deals with all anticipated costs
- Prepared for every department
- Can be further divided into sub-budgets:
- labor (direct & indirect)
- material (direct & indirect)
- overhead
- other expenses
Expense Budget
Prediction of the costs needed to get the work done
- May be part of the expense budget or a separate part of the operating budget
Labor Budget
Labor costs related to getting the work done (base pay, OT, pay in lieu of benefits)
- Included in the labor budget
Direct labor costs
Labor costs which managers have little control over, like taxes, insurance, paid time off, and so forth
- Not always included in the labor budget
Indirect labor costs
Part of the expense budget; computed for organizations or departments which make a tangible product
Material Budget
The estimate of cost for raw materials that go into making the product
Direct material budget
The general expenses associated with the operation of a facility like rent, taxes, utilities, repairs, and maintenance
Overhead
The estimate of cost of materials used, but not associated with making the product (i.e., office supplies)
Indirect material budget
Subdivision of the operating budget that encompasses all other anticipated costs of operation (e.g. telephone bills, printing, travel, fees, licenses)
Other operating expenses
Project spending on items that are costly and durable such as land, buildings, vehicles, and major pieces of equipment
- Not a part of the operating budget
- Usually there is an organization-wide system for allocating capital funds
- Managers must write proposals to request these monies
Capital Budgets
- Determine what capital goods are needed
- Prioritize the items on the list of needs
- Estimate the cost for each proposed capital expenditure
- Prepare the capital budget request including justification and cost data – return on investment
- Submit the proper paperwork to formalize the request
Five-step process to preparing a capital budget
